Government Preferences and SEC Enforcement

by Jonas Heese

Overview — The US Securities and Exchange Commission failed to detect several accounting fraud scandals in the last decade, raising the question of how the SEC chooses targets for enforcement. This paper looks specifically at whether the SEC, as a consequence of government pressure, reduces its enforcement actions for labor-intensive firms. Results indicate that voters' interests do drive political pressure on the SEC. The SEC incorporates such pressure in its enforcement actions, independent of firms' lobbying for their special interests.

Author Abstract

I examine whether political pressure by the government as a response to voters' general interest in protecting employment is reflected in the enforcement actions by the Securities and Exchange Commission (SEC). Using labor intensity as a measure of a firm's contribution to employment, I find that labor-intensive firms are less likely to be subject to an SEC enforcement action. Next, I show that labor-intensive firms are less likely to face an SEC enforcement action in presidential election years if they are located in politically important states. I also find evidence of a lower likelihood of SEC enforcement for labor-intensive firms that are headquartered in districts of senior congressmen that serve on committees that oversee the SEC. All of these results hold after controlling for firms' accounting quality and two alternative explanations for firms' favorable treatment by the SEC, i.e., firms' location and political contributions. These findings suggest that voters' interests drive political pressure on SEC enforcement-independent of firms' lobbying for their special interests.